Investor's Business Daily, March 5th, 2007
It may have been China that sparked the worldwide sell-off late last month, but Latin America felt the brunt of the decline.
Funds that invest abroad fell an average 0.31%, compared to a 0.98% drop by U.S. domestic funds, according to Lipper. Latin American funds tumbled 3.27%. China region funds actually ended up with a small gain of 0.22%, despite an 8.8% nose-dive in the Shanghai composite stock market index on Feb. 27.
Concern remained that further fallout from China could emerge, but some managers are still cautiously optimistic about growth there.
China's problems were caused by a lack of real liquidity and government efforts to tamp speculation before it got really bad, said Michael Donnelly, vice president and senior portfolio manager at American Century Investments. Donnelly runs the $690 million American Century Emerging Markets Fund TWMIX.
"There was a lot of lending going into the market," he said, citing reports of investors borrowing to buy stocks. "\ banks probably had a lot of bad loans already."
Slowdown Normal
Meanwhile, Donnelly said, other foreign markets were supercharged in 2006, and a slowdown is normal.
Such corrections are felt in other countries because China is more closely linked to the outside world -- especially Latin America -- than ever before.
"The guys selling commodities in Latin America, they're going to take a hit because of stepped-up trade with Asia over the last five years," Donnelly said.
But even against that background, Donnelly and others said there are sectors that will be hurt less. The recent sell-off was a short-term event, they said, and likely not a sign of a bear market.
James Oberweis, president of Oberweis Asset Management oversees the $650 million Oberweis China Opportunities Fund OBCHX. He said Chinese consumption has gone up and shows no signs of slowing.
Oberweis has put money into companies fueled by discretionary spending such as advertising and apparel.
Infrastructure spending in China and other emerging markets is also a good sign, said Daniel Geber, managing director at Epoch Investment Partners and portfolio manager for $314 million International Small-Cap Fund EPIEX.
Most Visible Spending
Geber said China is the most visible example of an infrastructure boom, which drives growth. But other countries are also preparing to drop lots of money on big-ticket projects.
That's why one big holding is the Dutch dredging company Royal Boskalis Westminster.
"We love the dredging business," Geber said. Ports need to be expanded in Brazil, the Panama Canal plans to expand to allow bigger ships, and there are only three other dredging firms that operate globally, he noted.
Markets in China can also automatically limit downturns. A stock stops trading if it drops by more than a certain amount. This cuts down the damage the Chinese market can cause, Geber said.
Donnelly disagrees that infrastructure is the way to go, citing the cyclical nature of the business. He likes energy and consumer goods better, though for different reasons.
One big holding in consumer goods is Cencosud of Chile, which had 1.76% of the fund as of Dec. 31. It is "the Chilean version of Wal-Mart WMT" Donnelly said.
Chile has a fiscally conservative government and a budget surplus. Teachers are getting raises and even miners are getting bonuses. Consumption is up and Cencosud has expanded into Argentina.
Donnelly's energy stocks are United Energy System of Russia, Gazprom OAO and Petroleo Brasileiro PBR.
Russia's gas reserves help shield its economy from the rest of the world's, he said. The price of gas is set far in advance, which limits volatility for those companies. Oil producers also are good bets as prices have gone up slightly.
But there still are reasons for concern in foreign markets. Geber said Americans' spending is rising faster than incomes, and that can't go on forever.
Japanese consumers may not be able to pick up the slack yet. Chinese consumers are spending more but they earn much less.
Donnelly said even a mild recession in the U.S. would have a big effect on China and the rest of the world.
China's growth might slow from 10% per year to 7%, which in turn slows down the rest of Asia. Europe also relies heavily on exports to the U.S.
Stock markets everywhere are likely to feel it. "If you see the world's largest economy slowing and the world's fastest growing economy slow down, you'll see a pull back," he said.
Copyright 2007 Investor's Business Daily, Inc.
